ABSTRACT:
Insurers typically argue that regulatory limits on their ability to use genetic tests will induce ‘adverse selection’; they say that this has disadvantages not just for insurers, but also for society as a whole. I argue that, even on its own terms, this argument is often flawed. From the viewpoint of society as a whole, not all adverse selection is adverse. Limits on genetic discrimination that induce the right amount of adverse selection (but not too much adverse selection) can increase ‘loss coverage’, and so make insurance work better for society as a whole. full text

Insurance loss coverage and social welfare

ABSTRACT:
Restrictions on insurance risk classification may induce adverse selection, which is usually perceived as a bad outcome, both for insurers and for society. However, a social benefit of modest adverse selection is that it can lead to an increase in ‘loss coverage’, defined as expected losses compensated by insurance for the whole population. We reconcile the concept of loss coverage to a utilitarian concept of social welfare commonly found in the economic literature on risk classification. For iso-elastic insurance demand, ranking risk classification schemes by (observable) loss coverage always give the same ordering as ranking by (unobservable) social welfare. full text

Insurance loss coverage and demand elasticities

ABSTRACT:
Restrictions on insurance risk classification may induce adverse selection, which is usually perceived as a bad outcome. We suggest a counter-argument to this perception in circumstances where modest levels of adverse selection lead to an increase in `loss coverage', defined as expected losses compensated by insurance for the whole population. This happens if the shift in coverage towards higher risks under adverse selection more than offsets the fall in number of individuals insured. The possibility of this outcome depends on insurance demand elasticities for higher and lower risks. We state elasticity conditions which ensure that for any downward-sloping insurance demand functions, loss coverage when all risks are pooled at a common price is higher than under fully risk-differentiated prices. Empirical evidence suggests that these conditions may be realistic for some insurance markets. full text

ABSTRACT:
This paper investigates equilibrium in an insurance market where risk classification is restricted. Insurance demand is characterised by an iso-elastic function with a single elasticity parameter. We characterise the equilibrium by three quantities: equilibrium premium; level of adverse selection; and “loss coverage”, defned as the expected population losses compensated by insurance. We find that equilibrium premium and adverse selection increase monotonically with demand elasticity, but loss coverage first increases and then decreases. We argue that loss coverage represents the efficacy of insurance for the whole population; and therefore, if demand elasticity is sufficiently low, adverse selection is not always a bad thing. pdf (29 pages)

ABSTRACT:
This paper investigates equilibrium in an insurance market where risk classification is restricted. Insurance demand is characterised by an iso-elastic function with a single elasticity parameter. We characterise the equilibrium by three quantities: equilibrium premium; level of adverse selection; and “loss coverage”, defned as the expected population losses compensated by insurance. We find that equilibrium premium and adverse selection increase monotonically with demand elasticity, but loss coverage first increases and then decreases. We argue that loss coverage represents the efficacy of insurance for the whole population; and therefore, if demand elasticity is sufficiently low, adverse selection is not always a bad thing.
pdf (17 pages) This paper was awarded a prize In June 2015 by
the International Actuarial Association!

Genetics and insurance in the United Kingdom 1995-2010: the rise and fall of "scientific" discrimination

ABSTRACT:
Around the millennium there was extensive debate in the United Kingdom of the possible use of predictive genetic tests by insurance companies. Many insurance experts, geneticists and public policymakers appeared to believe that genetic test results would soon become widely used by the insurance industry. This expectation has not been borne out. This article outlines the history of exaggerated perceptions of the significance of genetic test results to insurance, with particular reference to the United Kingdom, suggesting reasons why they arose and also why they have declined. The article concludes with some speculation about how policy on genetics and insurance might develop in future.
pdf (20 pages)

Non-risk price discrimination
in insurance: market outcomes and public policy

ABSTRACT:
This paper considers price discrimination in insurance,
defined as systematic price variations based on individual customer
data but unrelated to those customers’ expected losses or other
marginal costs (sometimes characterised as “price optimisation”).
An analysis is given of one type of price discrimination, “inertia
pricing,” where renewal prices are higher than prices for
risk-equivalent new customers. The analysis suggests that the
practice intensifies competition, leading to lower aggregate
industry profits; customers in aggregate pay lower prices,
but not all customers are better off; and the high level of
switching between insurers is inefficient for society as a whole.
Other forms of price discrimination may be more likely to increase
aggregate industry profits. Some public policy issues relating to
price discrimination in insurance are outlined, and possible policy
responses by regulators are considered. It is suggested that
competition will tend to lead to increased price discrimination
over time, and that this may undermine public acceptance of
traditional justifications for risk-related pricing.
pdf (19 pages)

Demand elasticity, risk classification
and loss coverage: when can community rating work?

ABSTRACT:
This paper investigates the effects of high or low fair-premium demand elasticity in an insurance market
where risk classification is restricted. High fair-premium demand elasticity leads to a collapse in loss coverage,
with an equilibrium premium close to the risk of the higher risk population. Low fair-premium demand elasticity
leads to an equilibrium premium close to the risk of the lower risk population, and high loss coverage – possibly
higher than under more complete risk classification. The elasticity parameters which are required to generate a
collapse in coverage in the model in this paper appear higher than the values for demand elasticity which have
been estimated in several empirical studies of various insurance markets. This offers a possible explanation of
why some insurance markets appear to operate reasonably well under community rating, without the collapse in
coverage which insurance folklore suggests.
pdf (25 pages)

Loss coverage as a public policy objective for risk classification schemes

ABSTRACT:
This paper suggests that from a public policy perspective, some degree of adverse selection may be desirable in
some insurance markets. The paper suggests that a public policymaker should consider the criterion of “loss coverage,” and
that in some markets a policymaker may wish to regulate risk classification with a view to increasing loss coverage.
Either too much or too little risk classification may reduce loss coverage. The concept is explored by means of examples,
formulaic and graphical interpretations. An application to the UK life insurance market is considered.pdf (22 pages)
&nbsp &nbsp &nbsp &nbsp
Powerpoint (46 pages)

On the value of not taking
advice

ABSTRACT:
Conventional wisdom commonly exhorts non-experts to
take expert advice when dealing with specialist fields. This works
well in relation to the physical or biological world, because
theories of these worlds are generally neutral: popular acceptance
of a theory does not change the phenomena it describes.
In contrast, theories of social phenomena such as finance are
often reflexive: popular acceptance of a theory does change the
phenomena it describes. Reflexive theories can be either
self-fulfilling or self-negating. Advice based on self-negating
theories is not likely to be useful. Expert advice is therefore
less useful in fields such as investment, which are dominated
by self-negating theories.
pdf (9 pages)

ABSTRACT:
This paper makes some observations on the interaction of United Kingdom taxation and portfolio decisions by a
personal investor managing his own investments in quoted company shares. I consider five holding vehicles: three
types of tax-advantaged account (ISAs, SIPPs, and spread bets); and two types of taxable account (a company
controlled by the investor, and direct holdings in the investor's personal account). I note some ways in which portfolio
management for a taxable account differs from management of a tax-advantaged account. I use simple models to
illustrate the difficulty of producing post-tax out-performance from active management of a taxable account. I suggest
some heuristic guidelines for allocating different types of investments across the five types of accounts. I also provide
some guidance for decisions on switching between investments in a taxable account. I note several quirks in the CGT
legislation which are useful for the active personal investor to know. Readers who want to read just results should go
directly to sections 9 to 11 of the paper.full version (46 pages) or
published version (23 pages) (updated for April 2008 changes).

Some
novel perspectives on risk classification

ABSTRACT:
This paper considers a number of novel perspectives on risk classification,
primarily in the context of life and critical illness insurance. I suggest that the
terminology of "adverse selection" is often misleading, because from a public policy
viewpoint adverse selection may not always be adverse. I suggest that public policymakers
should consider the criterion of "loss coverage," and that in many markets a socially
optimal level of adverse selection is that which maximises loss coverage. A review of
empirical studies suggests that adverse selection is often difficult to observe in
practice; this leads to the concept of propitious selection, and various psychological
perspectives on risk classification. I suggest that competition between insurers in
risk classification can sometimes be characterised as a malevolent invisible hand, and
that public policy should direct competition towards areas which are more clearly
beneficial to all insurance customers. I also consider the perspectives of risk
classification as blame, the conflict between risk classification and human rights,
and the fallacy of the one-shot gambler.
pdf (28 pages)

An earlier version pdf (28 pages)
presented at DIW Berlin in June 2005 included graphs of market prices.

Accident compensation: compensation culture? No! Justice culture.

ABSTRACT:
The Actuarial Profession in the UK has a policy (as explained on its website
here)
of campaigning against what it calls the "compensation culture." This involves the Profession
in making various insinuations against accident victims - for example, that it is in some way
blameworthy if accident victims receive compensation for negligence; or that the costs of such
compensation are excessive, or rapidly increasing, or otherwise unjustifiable.

I believe that this campaign is inconsistent with the data on accident compensation
in the UK, which show the costs of accident compensation to be lower than in
almost all other industrialised countries.

ABSTRACT: Zero-dividend
preference shares (zdps) are the simplest type of security
issued by UK investment trusts (closed-end funds). Zdps have
option-like properties, but there sometimes seems to be
little awareness in the investment trust world of option
pricing concepts. This three-page working note makes some
rudimentary observations on the factors which should
affect zdps prices. pdf (3 pages)

Genetics and
insurance: further notes to the Human Genetics Commission

ABSTRACT: An
examination of actual premium rates suggests large variations
for identical insurance covers, both between companies and
over time. In this context, the impact on insurance markets
of outlawing access to genetic tests is likely to be very
small. pdf (7 pages)

Genetics and
insurance: an actuarial perspective with a difference

ABSTRACT: This
is a response to a public consultation by the Human Genetics
Commission (HGC) in Februry 2001; a revised version was given
to the International Congress of Actuaries in Mexico in March
2002. Many individuals or organisations capable of commenting
technically on insurance discrimination have a commercial
interest in promoting such discrimination. Technical
expertise is therefore directed to the promotion of
discrimination for commercial ends, but little technical
expertise is applied to counteract it. This paper attempts to
redress the balance. Its central section comprises a
point-by-point rebuttal of some of the myths and half-truths
which are promulgated by those wishing to legitimise
insurers' access to genetic test results.HGC version pdf (15 pages) or ICA version pdf (17 pages)

ABSTRACT: This
paper reviews the stochastic asset model described in Wilkie
(1995) and previous work on refining this model. The paper
then considers the application of non-linear modelling to
investment series, considering both ARCH techniques and
threshold modelling. The paper suggests a threshold
autoregressive (TAR) system as a useful progression from the
Wilkie (1995) model. The authors are making available (by
email, on request) a collection of spreadsheets, which they
have used to simulate the stochastic asset models which are
considered in this paper.pdf (33 pages)
This paper was awarded a prize by
the Institute of Actuaries!

Positive theory
and actuarial practice(with AD Smith)

ABSTRACT:
Most of the extant theory which is used to justify actuarial
practice is normative. This short paper
proposes a positive approach to explaining
actuarial practice, explains how this differs from a
normative approach, and highlights the importance of the
"market for excuses." pdf (5 pages)

Actuarial values(with CD Sharp)

ABSTRACT: This
paper seeks to identify the characteristic values implicit in
contemporary actuarial thought and practice. 'Values' is used
here to mean fundamental concepts which we use, largely
intuitively, to guide our patterns of thought and behaviour.
We consider to what extent these values are characteristic
simply because actuarial work attracts individuals who
already subscribe to them, and to what extent these values
may be inculcated by actuarial training. We then consider
whether the characteristic values we have identified are
congruent with the changing values of wider society, and
whether they are likely to be conducive to the continuing
success of the profession in the 21st century. pdf (16 pages)

The right to
underwrite? An actuarial perspective with a difference(with TA Moultrie)

ABSTRACT: For
a very long time, underwriting has formed part of the
actuarial canon. With increasing frequency, challenges are
being issued against the right of insurance companies to
underwrite their applications for new business, arguing that
certain aspects of the practice are undesirably
discriminatory. This paper explores the role of the actuary
in the underwriting process, and the challenges that are
being set for the profession (as opposed to the life
insurance industry) as a result of this role. pdf (12 pages)

Indemnities for
long term price risk in the UK housing market

ABSTRACT:
Discusses the features which distinguish the market for
residential property from the markets for other assets.
Proposes that financial institutions should offer house
buyers indemnity policies which pay out an amount related to
any fall in the level of a general index of house prices, on
the sale of the house at a loss at any time during the
mortgage term. To facilitate hedging the risk of a portfolio
of such policies (and therefore, the pricing of the
policies), a market in 'perpetual futures' on indices of
housing assets is proposed. Discuss possible users of these
contracts, and outlines further research. pdf (17pages )